Exam 12: Evaluating and Improving Entity Performance

TPC Company is considering a new incentive system under which bonuses will be awarded to divisional managers employing the following weights: Division performance 15% Corporate performance 70% Individual performance 15% Todd Brown, a divisional manager, believes he has minimal impact on overall corporate performance and only a 10% impact on group performance in his division. How motivating does expectancy theory suggest the new system will be for Brown?

Thomas Enterprises reported the following actual vs. budgeted performance for its recently concluded year: Required: Compute the variances by line item for Thomas Enterprises.

Incentives are motivational tools intended to:

In an organization that values cooperation and synergies among divisional managers, relative performance evaluations may prove to be harmful.

For a recently concluded period, Davis Company reported a favorable sales volume variance. This variance implies that the cost of goods sold in Davis' flexible budget will be larger than the amount included in its static budget.

Performance/reward functions that feature upper and lower limits often encourage gamesmanship on the part of managers.

In recent years, Diageo plc has made a significant strategic commitment to reducing the company's carbon footprint. An unusual opportunity arose to make progress against this corporate goal by having a Canadian subsidiary substitute methane pumped from a local landfill for natural gas to power its manufacturing facility. Doing so, however, would negatively impact the income of the subsidiary and the performance evaluation of this investment center's management. The managers were assured by the corporation that adjustments would be made to their performance evaluations if they went ahead with the methane project. This incident illustrates the use of:

If the data is available regarding actual variable and fixed manufacturing costs, the difference between the actual cost of goods sold and its amount in the flexible budget, or the manufacturing cost variance, can be further disaggregated into:

The potential for favoritism bias is a serious limitation of relative performance evaluations.

After the first three quarters of the year, Apex, Inc., was well ahead of its budgeted targets for corporate income and earnings per share. During the fourth quarter, the company found that divisional managers were holding sales open, thereby delaying revenue recognition to the following year. Several sales of assets expected to generate gains were also delayed for no apparent business reason. Given the behavior of its divisional managers during the fourth quarter, it is likely that:

K-Lane Industries, Inc., reported an unfavorable profit variance for its most recently concluded quarter. This implies that the company's:

Abrasive Brothers, Inc., manufactures brake pads for automobiles. For April 2017, the company's static budget projected 5,000 units would be produced and sold at a variable cost of $6 per unit and total fixed costs of $12,000. The budgeted selling price was $18 per unit. Actual results for April were somewhat disappointing in that the company produced and sold only 4,200 units at an actual price of $17.50 per unit. -What sale volume variance would the company report for April?

When preparing a static budget, all budgeted line item amounts are adjusted for the actual level of sales volume achieved.

For a given year, the static budget of Norton and Cramden Company was developed based on forecasted sales of 12,000 units. Actual sales for the year totaled 14,000 units. The preparation of a flexible budget to evaluate performance by responsibility center should be based on:

If a company falls short of the level of sales volume specified in a static budget, then the variable manufacturing cost will be adjusted upward in the flexible budget.

Volponi Limited produces and distributes high-quality feed products for thoroughbred racehorses. The business is highly competitive with narrow margins, and must be managed carefully to remain profitable. The company reports the following budgeted and actual results for the last year: In order to analyze its performance, the company annually prepares a variance analysis. Using the data above: Required: a. Compute the industry volume variance. b. Compute the market share variance. c. Compute the selling price variance.

Disaggregating variances by income statement line item is a common and effective method for isolating the underlying causes of those variances.

Williams Corporation features a compensation system that offers a bonus above base salary for exceptional performance. Managers of all responsibility centers receive bonus payments if earnings per share is at least 10% larger than the previous year. If the increase in earnings per share is less than 10%, no bonus is paid. As the current year nears its close, it is apparent that the company's poor performance will make it impossible for management to reach the threshold for bonus payments. Under these circumstances, management will have an incentive:

A sales volume variance reflects the difference in the bottom line income number due to differences between the actual number of units sold and the number of units forecast in the flexible budget.

The sales price variance is computed based on the actual number of units sold, not the number of units forecast in the static budget.